Institutional Investment in the UK - our response to the Myners Review
In July this year, Watson Wyatt prepared a submission to the UK government’s consultation document into institutional investment (the Myners Review). The key points in our response are:
- A typical UK pension fund spends 27 basis points per annum on investment management but only half a basis point on setting investment policy. Trustees could increase their ‘governance budget’ – the time, resources and methods they devote to managing their assets – through the following:
- concentrating on policy matters rather than implementation
- obtaining more employer input
- using a better organisational model.
- We suggest the better organisational model (see also - Best practice in governance) which could involve one or more of the following:
- the use of an investment sub-committee
- the appointment of an investment executive officer
- out-sourcing of investment implementation to an external professional firm.
- Greater investment in venture capital would benefit many UK pension funds in terms of improving returns and diversifying risk. However, the limited governance budget issue makes implementation difficult. The Government could help to address this problem by clarifying the current regulatory framework.
- The pension guarantees incorporated in UK pension funds make heavier bond investment inevitable as funds mature and no rational revisions to the MFR will solve this problem; although the MFR could be improved in some areas to correct its worst anomalous incentive effects.
- Despite the above issues, UK pension funds have by international standards been competitive in their investment activities; we estimate that a typical fund’s higher equity content is expected to provide a cost or efficiency advantage of 13% over the global average.
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